AIA Disagrees with N.M. Supreme Court Ruling Permitting Third Party Lawsuits Against Auto Insurers

A New Mexico Supreme Court ruling recently to allow third party bad faith suits against insurers in auto liability cases will likely result in higher costs for policyholders, the American Insurance Association (AIA) said.

“This case takes New Mexico way out of the mainstream by imposing third party bad faith on compulsory auto insurers. Most other states have refused to adopt this principle, for good reason,” said David Snyder, AIA vice president and assistant general counsel.

“This decision will adversely affect every family and business who owns a motor vehicle in New Mexico by unnecessarily raising their costs because the potential of “bad faith” liability will be used to leverage insurers into settling claims that should be contested or settling for more than is objectively justified. The resulting higher costs will put upward pressure on the auto insurance premiums that nearly everyone pays,” Snyder said.

The case, Hovet v. Lujan, arose when Hovet was hit by a vehicle driven by Lujan and insured by Allstate. Hovet sustained injuries resulting in more than $11,000 in medical bills and Allstate offered her $7,200 to settle the case or go to trial. Hovet chose to sue Lujan and Allstate, and she was awarded $62,050 in damages by a jury. Allstate paid the damages and court costs, but contested Hovet’s right to sue the insurer under a separate unfair practices claim. A District Court subsequently threw out the claim against Allstate, but the California Court of Appeals later ruled that the lawsuits could be allowed, and the California Supreme Court agreed by a vote of 4-1.

“This decision is based on a reckless reading of statutory language, which was quite clear that the legislature intended private rights of action only for an insurer’s own policyholder, with whom the insurer has a contract and owes duties. Indeed, by imposing duties on insurers to cooperate with the parties suing the insurer’s own customers, the insurers are put in an impossibly conflicted position,” explained Snyder.

“The Supreme Court’s decision is one of the most damaging assaults that can be made on the stability of an insurance market. We need only to look at the upward costs and destabilizing effects that a similar decision (Royal Globe Ins. Co. v. Superior Court) had on the California auto insurance market. That ruling allowed third party suits against insurers from 1979 until 1988 when a newly configured Supreme Court reversed the decision (Moradi-Shalal v. Fireman’s Fund Ins. Cos.). Since then auto insurance premiums in the state have been stable,” continued Snyder.

“Because the New Mexico Supreme Court’s decision was based on statutory language, the legislature can repair the damage done and eliminate the increased costs and unfairness that will result from this misguided decision,” added Snyder.